Challenges to Prior Transactions

Question 1

When can a challenge to pre-sequestration or liquidation transactions occur?

Answer 1

An area where a transaction entered into by the debtor prior to insolvency can be challenged either to (a) recover assets conveyed to third parties; or (b) strike down securities in favour of third parties.

The idea is that certain transactions that are entered into immediately before or after liquidation or sequestration can be struck down (and the asset in question will return to the insolvent estate).

Question 2

What are the rules?

Answer 2

There is:
⁃ 1) A set of rules at common law which strike down fraudulent transactions.
⁃ These are discussed in the handout pp 47-48 but SW not going to discuss in any detail because in practice the statutory rules are used. The basic same principles apply - it is the same sort of transactions which can be struck down. The one advantage of using the common law as opposed to statutory rules is that at common law there is no fixed time limit (but subject to the rules on negative prescription which is normally 20 years because it is usually concerning a real right).
⁃ 2) A set of statutory rules to strike down unfair preferences.
⁃ 3) Statutory rules to strike down gratuitous alientations.

Question 3

What is needed for fraudulent transactions at common law? (McBryde analysis)

Answer 3

This basically underpins the legislative rules in relation to Gratuitous Alienations.

Question 4

What is the meaning of fraud?

Answer 4

Means an intent to deceive. It is less than the criminal requirement. It is potentially prejudicing one creditor at the expense of others. You prejudice the interests of the creditor by prioritising one person. It is not fraud in the criminal sense. When you know you are about to go bust and you give your house to your spouse in order to diminish assets available to the general body of creditors. Fraud in the civil law purpose. The examples mirror the provision under the statute.

The two principal examples are:

1. Transfer of an asset as a gift or greatly undervalued
2. Unfair preferences

Question 5

What is needed for fraudulent transactions at common law?

Answer 5

1. prejudice to creditors diminish estate for creditors
2. absolutely insolvent or about to become so
3. Other party to transaction (not debtor) need not know there is a problem, but if they do then
4. collusion between transferee and debtor suggests fraud
5. fraud cannot be accidental – debtor must know insolvent
6. Transaction needs to be a voluntary action – no legal compulsion so to act
7. ordinary acts of administration are not fraudulent transactions, extraordinary ones might be eg can you pay your bills?

Question 6

Who can raise an action at common law?

Answer 6

Any creditor not a party to it (whenever the debt was incurred) or trustee in sequestration

Remedy: reduction or redelivery

See Wylie, Stewart & Marshall v Jarvis 1913 1 SLT 465

Note: the key for challengeable transactions at common law to differentiate them from normal transactions is that there is no fixed time limit for challenge. Instead the law of negative prescription applies (20 years). Under state you only get a challenge after 2 or 5 years under unfair preference you only get a challenge after 6 months.